Experts share realities behind generic, specialty drug pricing

Photo: Abby via Flickr

Photo: Abby via Flickr

Health journalists received a few lessons in economics during a discussion last week on some alarming drug trends – largely the result of a broken market – that are threatening patient care and undermining the U.S. health care system.

At a New York City chapter eventPhil Zweig, a longtime financial journalist who also runs a group called Physicians Against Drug Shortages, spoke about the scarcity of generic drugs in hospitals and clinics – a problem that has persisted for years. Hospital group purchasing organizations (GPOs), which are not regulated and essentially negotiate supply purchases for hospitals, have the ability to charge market share to the highest bidder. Zweig said they can do this because the safe harbor provision in the 1987 Medicare anti-kickback law excluded GPOs from criminal prosecution for taking kickbacks from suppliers.

“The more you can pay to a GPO, the more market share you get,” Zweig said.

Because of the exclusive contracts that GPOs award, the number of competitors in the market shrinks, which has led to a shortage of generic prescription drugs – everything from sterile injectables to chemotherapy agents.

On the other end of the spectrum are specialty drugs. Peter Bach, M.D., spoke about the reasons behind skyrocketing drug prices in the oncology market.

Bach, who is the director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering, is probably known best for a decision he and his colleagues made in 2012 when they rejected Zaltrap, a high-priced colorectal cancer drug, because it worked exactly like the lower-cost existing drug. After writing about the decision in a New York Times op-ed, Zaltrap’s manufacturer decided to discount the drug to Memorial Sloan Kettering only to reveal how arbitrary the pricing really was in the first place.

“But when we rejected Zaltrap it didn’t fundamentally change pricing behavior,” Bach said.

A couple of factors make Bach think that the problem of pricing will only get worse. For starters, the public is used to hearing about thousand-dollar drugs. Bach said no one batted an eye when the leukemia drug Blincyto was released on the market recently with a $178,000 price tag for a 12-week course.

“As a society we don’t have any levers at our disposal or societal will to push back on prices so prices can be whatever manufactures want them to be,” Bach said.

However, Bach said that manufacturers can’t actually raise prices infinitely and still have desirable drugs for doctors because practices have to maintain inventories that could end up costing millions of dollars. Inevitably, the economics for small private practices start to collapse, according to Bach.

“That has created this intriguing problem which is that, as this is happening, the economics of hospitals have become increasingly attractive,” Bach said.

Hospitals will continue to consolidate and buy up small practices in today’s health care economy, which leads to higher reimbursement because hospitals have more leverage than private practices to negotiate.

“There are lots of examples where a doctor from a private practice is purchased by a hospital and he gets new stationary [and a new tax ID number] and then gets to charge three times as much for drugs,” Bach said.

Bach originally got interested in tracking these prescribing patterns as he continued to see rising drug prices and profits to doctors.

“When there have been sudden changes in reimbursement, sudden changes in prescribing patterns travels with it and nothing is happening clinically,” Bach said.

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